TEXT-Fitch rates Meritage Home Corp proposed notes

September 12, 2012|Reuters

Sept 12 - Fitch Ratings has assigned a 'BB-/RR3' rating to Meritage HomesCorporation's (NYSE: MTH) proposed offering of $100 million principalamount of convertible senior unsecured notes due 2032. This issue will be ratedon a pari passu basis with all other senior unsecured debt. Net proceeds fromthe notes offering will be used for working capital and general corporatepurposes. The Rating Outlook is Stable. A complete list of ratings follows atthe end of this release.

The ratings and Outlook for MTH are influenced by the company's execution of itsbusiness model, conservative land policies, geographic and product line diversity, acquisitive orientation and healthy liquidity position.

Builder and investor enthusiasm have for the most part surged so far in 2012. However, national housing metrics have not entirely kept pace. Year-over-year comparisons have been solidly positive on a consistent basis. Yet, month to month the national statistics (single-family starts, new home, and existing homesales) have been erratic and, at times, below expectations. In any case, year todate these housing metrics are well above 2011 levels. As Fitch has noted in thepast, recovery will likely occur in fits and starts. (MTH reported net order growth of 43% for the six months ended June 30, 2012, far exceeding national data and implying market share gains.)

Fitch's housing forecasts for 2012 have been raised since early spring but stillassume only a moderate rise off a very low bottom. In a slowly growing economy with relatively similar distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, single-family housing starts should improve about 12%, while new home sales increase approximately 10.5% and existing home sales grow 5.6%. Further moderateimprovement is forecast for 2013.

MTH's sales are reasonably dispersed among its 15 metropolitan markets within seven states. The company ranks among the top 10 builders in such markets as Houston, Dallas/Fort Worth, San Antonio and Austin, TX; Orlando, FL; Phoenix, AZ; Riverside/San Bernardino, CA; Denver, CO; and Sacramento, CA. The company also builds in the East Bay/Central Valley, CA; Las Vegas, NV; Inland Empire, CA; Tucson, AZ; and Raleigh-Durham, NC. MTH also recently announced its entry into the Charlotte, North Carolina market with operations anticipated to commence during the second half of 2012. Currently, about 65%-70% of MTH's homedeliveries are to first- and second-time trade-up buyers, 30%-35% to entry-levelbuyers, less than 5% are to luxury home buyers and less than 5% to active adult (retiree) buyers.

MTH employs conservative land and construction strategies. The company typicallyoptions or purchases land only after necessary entitlements have been obtained so that development or construction may begin as market conditions dictate.

Under normal circumstances MTH extensively uses lot options, and that is expected to be the future strategy in markets where it is able to do so. The useof non-specific performance rolling options gives the company the ability to renegotiate price/terms or void the option, which limits downside risk in marketdownturns and provides the opportunity to hold land with minimal investment.

However, as of June 30, 2012, only 17% of MTH's lots were controlled through options - a much lower than typical percentage due to considerable option abandonments and write-offs in recent years. Additionally, there are currently fewer opportunities to option lots and, in certain cases, the returns for purchasing lots outright are far better than optioning lots from third parties.

Total lots controlled, including those optioned, were 17,586 at June 30, 2012. This represents a five-year supply of total lots controlled based on trailing 12-months deliveries. On the same basis, MTH's owned lots represent a supply of 4.1 years.

MTH successfully managed its balance sheet during the severe housing downturn, allowing the company to accumulate cash and pay down its debt as it pared down inventory. The company had unrestricted cash of $81.6 million and investments and securities of $103.8 million at June 30, 2012. The company's debt totaled $596.1 million at the end of the second quarter. MTH has no major debt maturities until April 2017, when approximately $100 million of senior subordinated notes mature.

In July 2012, the company completed a public offering of 2,645,000 shares of itscommon stock. Net proceeds of $87.1 million will be used for working capital and other general corporate purposes. Additionally, MTH recently entered into anew $125 million unsecured revolving credit facility due 2015.